Court: District Court, N.D. California; April 4, 2016; Federal District Court
Two motions from Flintkote Company and The Flintkote Trust seek: (1) an order for defendants Aviva PLC, Aviva International Insurance, Ltd., and The Ocean Marine Insurance Company Limited to post a bond under California Insurance Code § 1616; and (2) compliance with contractual obligations to pay the liquidated value of asbestos-related injury claims. Aviva has filed a motion for partial summary judgment regarding its payment obligations, claiming that its liability is limited to amounts Flintkote has actually paid to claimants, asserting California law governs the dispute.
The Court denies Flintkote's motion regarding trust payments, grants Aviva's motion for partial summary judgment, and grants Flintkote's motion for a bond. The background involves a long-standing relationship marked by multiple legal challenges across various jurisdictions. Key elements for resolution include identifying the parties, examining the operation of The Flintkote Trust, reviewing relevant agreements and policies, determining applicable law, and clarifying payment obligations and bond applicability.
The Flintkote Trust emerged after Flintkote's Chapter 11 bankruptcy filing in 2004. Flintkote, once a Delaware corporation based in California, specialized in asbestos-containing building materials. Aviva, based in London, issued asbestos liability insurance policies to Flintkote.
The Trust is established to manage and pay pending and future asbestos bodily injury (ASBI) claims through designated Trust Distribution Procedures (TDPs). These procedures detail the processing and payment of claims, aiming to distribute funds fairly among claimants over time. Claimants can seek recovery for one of seven disease categories, with nominal values assigned to each claim. The nominal "Scheduled Values" for an expedited review range from $650 to $184,000, while claims under individual review have "Maximum Values" between $650 and $450,000. However, the actual payment to claimants is limited by a "payment percentage," which may result in lower payouts than the nominal values.
The current dispute involves Aviva's indemnity obligations to Flintkote, with Aviva asserting it is only responsible for the payment percentage, while Flintkote contends that Aviva must pay the full liquidated value of the claims. Flintkote argues that allowing Aviva to only pay the payment percentage would enable the insurer to benefit from Flintkote's insolvency, which is against legal principles. Flintkote believes that recovering the full liquidated value would ultimately benefit claimants. The TDPs indicate that the Initial Payment Percentage, set by the Trust's governing bodies, can be adjusted based on estimates of claims and assets, and any increases could result in additional payments to previously liquidated claims. However, the TDPs also caution that there is no guarantee of higher payments, acknowledging the uncertainty surrounding future claims and the Trust's financial status.
Section 4.2 of the TDPs mandates that the Trustees review the Payment Percentage at least every three years, ensuring it reflects accurate and current information. They may adjust this percentage with the consent of the TAC and the Future Claimants Representative, taking into account estimates of present and future Trust Claims, the Trust's asset values, anticipated expenses, and other relevant factors affecting fund sufficiency. Flintkote argues that any additional revenue from insurers like Aviva must be allocated to benefit claimants, citing section 4.3, which requires that insurance proceeds first stabilize the current Payment Percentage. However, the Court clarifies that this provision does not establish a direct link between insurance recoveries and claimant payments, emphasizing the Trustees' discretion in adjusting the Payment Percentage based on external factors.
To determine Aviva's payment obligations to Flintkote, the Court examines original agreements and relevant policies. Flintkote was involved in litigation with general liability insurers during the 1980s, culminating in the Wellington Agreement, a 1985 settlement among various manufacturers and insurers (excluding Aviva) that addressed contribution and indemnity issues in asbestos-related lawsuits. This agreement established the Asbestos Claims Facility to manage and settle claims, which operated until its dissolution in 1988, after which Flintkote took over its own defense. The Wellington Agreement remains binding on its signatories despite the Facility's closure.
Wellington Agreement signatories, including Flintkote, are currently involved in arbitration addressing whether insurers must pay Flintkote the full liquidated claims value or a trust payment percentage. Insurers participating in this arbitration share responsibility for some of the policies relevant to the current dispute, with Aviva holding only a portion of these policies, while the remainder is under arbitration in the Wellington Agreement proceedings. The Wellington Agreement is significant to this dispute for three reasons:
1. The parallel arbitration offers insights on how an independent forum might resolve the same issue.
2. The absence of a choice of law provision in the insurance policies has led parties to reference the Wellington Agreement, which stipulates that all disputes related to the Agreement shall be governed by the applicable common law of U.S. states.
3. Flintkote argues that its 1989 Agreement with Aviva incorporates key provisions from the Wellington Agreement, including the choice of law clause and a stipulation that subscribing insurers waive defenses that could reduce coverage. This assertion is supported by language in the 1989 Agreement stating that Aviva must grant Flintkote rights equivalent to those held by Subscribing Producers under the Wellington Agreement, with interpretations aligned accordingly.
Although Aviva did not initially join the Wellington Agreement, it entered into a separate settlement agreement with Flintkote in 1989, which included many provisions from the Wellington Agreement. Notably, the 1989 Agreement allows for litigation rather than binding arbitration, which is why this matter is currently pending in federal court.
Flintkote has been engaged in litigation with Aviva for decades concerning the coverage scope and the parties' rights under a 1989 settlement agreement. Flintkote filed for Chapter 11 bankruptcy in 2004, and from 2006 to 2012, the parties mediated their disputes. In December 2012, Aviva sought to lift the bankruptcy stay to file for declaratory relief in California, prompting Flintkote to preemptively file a similar action in Delaware. Flintkote also filed a motion to compel arbitration, while Aviva moved to dismiss or transfer the venue. The Delaware District Court granted Flintkote's motion to compel arbitration and dismissed Aviva's motions as moot, but this decision was reversed by the Third Circuit. Upon Aviva's renewed motion, the Delaware District Court noted Flintkote's anticipatory filing and decided to depart from the first-filed rule, citing Flintkote's knowledge of Aviva’s intent and its motive to avoid an unfavorable California case. Consequently, the case was transferred to the Court.
All insurance contracts involved contain similar language, stating that insurers will indemnify the Assured for personal injury liabilities imposed by law. The policies are subject to the same terms as the Underlying Umbrella Policies, which stipulate the insurer will pay all sums the Insured is legally obligated to pay for personal injury damages. Additionally, the umbrella policies state that the insurer is liable only for losses exceeding the limits of underlying insurances per occurrence. "Ultimate net loss" is defined as the total obligation incurred by the Assured or any insurer due to personal injury, property damage, or advertising claims, whether through adjudication or compromise.
Both parties seek the Court's guidance regarding Aviva's payment obligations to Flintkote, particularly in relation to other unresolved issues, such as the nature of the insurance policies as "pay first" and the timing of payment, which have not been thoroughly addressed and will not be decided in the current order. The Court notes that these matters, including the impact of defense cost payments on policy limits and the coverage of certain trust expenses, are set for future resolution and are largely irrelevant to the main issue of Aviva's obligation to pay.
The legal standard for resolving these issues involves the principles of summary judgment, which apply to matters of choice of law and contract interpretation. Summary judgment is warranted when there is no genuine dispute over material facts, placing the initial burden on the moving party to demonstrate this absence, after which the burden shifts to the non-moving party to present specific facts showing a genuine issue for trial. The Court must view evidence favorably to the non-moving party and cannot rely on speculative claims to oppose summary judgment.
The competing motions from both parties focus on a specific provision of Flintkote's second amended complaint regarding the basis for Aviva's coverage obligation—whether it is determined by the liquidated value of the claim or the actual payment amount from the Trust. The Court identifies the requested relief as declaratory and acknowledges that the parties agree on the relevant facts but dispute the applicable law and its interpretation.
California law governs the contract dispute at issue. The court will evaluate relevant choice of law issues, particularly focusing on the case Fuller-Austin Insulation Co. v. Highlands Ins. Co., which addressed an insurer's obligations in light of an insured's bankruptcy under 11 U.S.C. § 524(g). The Fuller-Austin case concluded that an insurer's indemnity obligations are based on actual payments made to claimants, rather than hypothetical or "best case scenario" figures set by a trust, emphasizing that public policy cannot redefine the scope of insurance coverage.
The parties agree that the Wellington Agreement’s choice of law provision is central to resolving the dispute, which states that all issues regarding the Agreement will be governed by the applicable common law of U.S. states. Flintkote interprets this to mean reliance on general contract interpretation rules for insurance policies, while Aviva counters that there is no overarching national common law, as established by Erie R. Co. v. Tompkins, meaning that state law applies unless overridden by federal law.
Flintkote contends there is no conflict of laws regarding its insurance policies, asserting that all courts agree the insurer must pay the full Liquidated Value. However, an examination of the cited cases reveals that only two federal trial courts have reached a different conclusion, both following an outdated legal approach from the Seventh Circuit, specifically in UNR Indus. Inc. v. Cont’l Cas. Co., where the court ruled that Illinois law governed the case. In UNR, the court found that UNR, a bankrupt asbestos manufacturer, had experienced a "loss" under its insurance policy, and thus Continental Casualty Company could not pay based on the reduced amounts received by the bankruptcy trust, aligning with Illinois bankruptcy provisions. Following UNR, the ARTRA case also applied Illinois law, mandating the insurer to indemnify the full loss amount rather than a discounted amount from the bankruptcy estate. Similarly, in Nat’l Union Fire Ins. Co. v. Porter Hayden Co., the court distinguished its ruling from Fuller-Austin, asserting it lacked precedential value. Crucially, Flintkote's cited cases do not hold precedential value in the current court, which favors the arbitrator's Phase I rulings in the Wellington Agreement proceedings that determined California law applies, as it best suits the case facts and context. This conclusion aligns with the court's analysis of conflict of laws principles, which dictate that in diversity cases, federal courts must adhere to the forum state's conflict of laws rules, starting with the presumption of applying local law unless a timely foreign state law is invoked.
In determining which state's law should apply in a legal dispute, if only one state has a legitimate interest, that state's law should govern. California employs two choice of law tests regarding contracts: a statutory test and a governmental interest test. Under the governmental interest analysis, courts first assess whether there is a conflict between the laws of the relevant jurisdictions. If no conflict exists, California law applies. In cases of conflict, the courts evaluate the interests of each jurisdiction to see which has a greater stake in having its law applied, conducting a "comparative impairment analysis." The law of the jurisdiction with the more significantly impaired interest must be applied.
In the case at hand, Flintkote contends there is no conflict of laws, a position the Court rejects, and claims that Delaware law should apply due to its incorporation there and its relevance to "The Trust." However, the Court finds this argument unconvincing for two reasons: the dispute involves the interpretation of payment obligations in insurance contracts predating Flintkote's bankruptcy and the creation of the trust, which diminishes Delaware's relevance. The Court must focus on how to interpret the insurance contracts' payment obligations in the context of Flintkote's bankruptcy and the claims being made.
Flintkote's motion to keep its case in the Delaware District Court was denied, with the court transferring the case to another jurisdiction. The court determined there was significant evidence indicating Flintkote filed its suit to preemptively counteract an anticipated lawsuit from Aviva in the Northern District of California, aiming to sidestep the Fuller-Austin ruling. The court noted that the reasons Flintkote provided for claiming Delaware was a more convenient forum had been applicable since 2009, when Flintkote originally filed in California despite being in bankruptcy in Delaware and proposing a 524(g) trust under Delaware law. Additionally, in a prior case involving Flintkote and Aviva, Flintkote's legal representatives successfully argued for the application of California law, emphasizing California's vested interest in enforcing insurance obligations and the development of laws regarding asbestos insurance coverage. The court found Flintkote’s arguments relevant to California’s governmental interest test compelling, particularly as Flintkote is headquartered there and there are numerous pending claims in California.
California is identified as the primary location of the insured risk, which is crucial for determining the applicable law in insurance contract disputes. The state has a significant interest in resolving issues related to its residents and has been the venue for many asbestos-related cases involving Flintkote. California aims to protect victims of asbestosis, a disease that may take decades to manifest, highlighting its vested interest in regulating insurance contracts within its jurisdiction.
The Wellington Agreement's intent, as articulated by its architect, emphasizes uniform claims resolution to avoid inconsistent outcomes across different jurisdictions, underscoring the importance of applying California law to these matters. The 1989 Agreement further stipulates that interpretations must align with the Wellington Agreement.
The case of Fuller-Austin establishes the obligations of insurers concerning indemnity payments to Flintkote's 524(g) trust for asbestos-related claims. Both Flintkote and Fuller-Austin had similar exposure liabilities and sought bankruptcy protection, proposing reorganization plans under the Bankruptcy Code. Insurers, including Aviva, contested these plans to the extent they affected their policy rights. The plans included trust mechanisms for evaluating claims and provided options for claimants to appeal through arbitration or jury trials. The claims resolution procedures set forth allowed liquidated values for various asbestos-related diseases, with claimants receiving a percentage of these values.
The Trust’s asset value represents only a small fraction of the allowed liquidated value. The Fuller-Austin insurance policies state that insurers will indemnify the Assured for all sums the Assured is legally obligated to pay for damages and expenses, defined as “ultimate net loss.” This term refers to the total amount the Assured or their insurer must pay due to personal injury, property damage, or advertising liability claims, either through court adjudication or settlement. Initially, the trial court agreed with Flintkote's argument that indemnity should cover the allowed liquidated value of each claim rather than the actual payment percentage made to claimants. However, the California Court of Appeal reversed this decision, clarifying that indemnity applies only to the amounts Fuller-Austin was legally obligated to pay, which corresponds to the payment percentage rather than the allowed liquidated value. The court noted that the allowed liquidated value represents an ideal scenario with a 100 percent payment rate and that public policy cannot redefine insurance coverage limits.
Flintkote contends that its situation differs from that in Fuller-Austin by making three main points: first, there is no direct linkage in Fuller-Austin between insurance proceeds and increased claim benefits; second, Flintkote’s Trustees have limited discretion under its Trust Distribution Procedures (TDPs), mandating that insurance recoveries benefit claimants; and third, Flintkote’s plan explicitly connects insurance recoveries to payment percentages, unlike in Fuller-Austin. The court observed similarities between the claims resolution processes of both trusts, noting that both allow for increased payment percentages based on additional asset recoveries. Fuller-Austin's petition for a writ of certiorari highlighted that their plan permits payment increases if more assets become available, granting Trustees the authority to adjust the payment sum percentage and allowed liquidated value for asbestos-related claims. The Flintkote Trust TDPs have similar provisions.
The Payment Percentage may be adjusted by the Trust Advisory Committee and the Future Claimants Representative, reflecting current estimates of the Trust’s assets, liabilities, and claims. Flintkote’s argument regarding the Trustees' discretion is countered; the Trust Distribution Procedures (TDPs) do not strictly mandate that insurance recoveries benefit claimants. Instead, they allow Trustees to reconsider the Payment Percentage every three years, based on accurate information, with necessary adjustments agreed upon by relevant committees.
In contrast, the Fuller-Austin Claims Resolution Procedures (CRPs) require annual evaluations of the payment percentage and permit supplemental payments to previous claimants if adjustments are made. Both Flintkote's and Fuller-Austin's procedures aim to maximize value for claimants. An arbitrator in a related proceeding found no distinction in the obligation of insurers to provide adequate coverage, confirming that Aviva is obligated to pay the trust payment percentage rather than a liquidated value. Flintkote's claim that Aviva waived this argument was rejected; the Wellington Agreement specifies that insurers waive defenses based on conditions or exclusionary provisions that would limit coverage. There is a distinction between coverage defenses arising from exclusionary language and the insuring agreement's scope, supported by relevant case law references.
The excerpt clarifies the distinction between a lack of coverage assertion and limitations on coverage terms within the insurance policy, emphasizing that the current dispute is about the scope of coverage rather than a defense against it. An arbitrator in a related case found that the waiver language in the Wellington Agreement does not support Flintkote’s claims regarding coverage obligations. The court has determined that a bond is necessary to secure any potential final judgment against Aviva, following California Insurance Code section 1616, which mandates that nonadmitted foreign insurers must either obtain a certificate of authority to operate in California or post a bond. Aviva, a foreign U.K. entity, has not produced such a certificate and has conceded that Ocean Marine is not an admitted surplus lines carrier in California. The court emphasizes that compliance with section 1616 is mandatory, contrary to Aviva's argument that section 1620(a) provides an exception. Aviva claims that the insurance policies were issued under the laws of England or Canada, which would exempt them from the bonding requirement. However, it must provide evidence of compliance with those jurisdictions' regulatory requirements. The court has found that California law governs the contract interpretation, complicating Aviva's position. Lastly, Aviva argues that if section 1616 does apply, then section 1620(b)(1) offers an alternative by demonstrating sufficient U.S. funds to satisfy a final judgment.
California Insurance Code section 1620(b)(1) allows courts to require insurers to post a bond in actions arising from insurance contracts unless the insurer can demonstrate it has sufficient funds or securities in the U.S. to cover any final judgment and will pay without litigation. This applies when California Insurance Code section 1616 does not, as clarified by case law. Section 1616 mandates compliance with state certification requirements for non-admitted foreign insurers but allows posting a bond as an alternative. In the current case, the court must determine an appropriate bond amount, with Flintkote proposing $15 million and Aviva suggesting $2 million. The court has already ruled that Aviva is obligated to pay Flintkote a trust payment percentage, and now orders both parties to confer and submit statements on an appropriate bond amount by April 22, 2016. The court denies Flintkote's motion for a declaration on trust payments, grants Aviva's motion for partial summary judgment, and grants Flintkote's motion for a bond. Flintkote's motion to add The Flintkote Trust as a plaintiff has also been granted.
In Flintkote Co. v. Aviva PLC, the court identifies the plaintiffs as Flintkote, with a focus on a series of defendants, successors to The Commercial Union Assurance Company Ltd., which issued asbestos liability insurance policies. A recent motion by the defendants to replace Aviva PLC with The Ocean Marine Insurance Company Limited was denied, and Ocean Marine was instead added as a defendant. The court collectively refers to the defendants as "Aviva." Numerous motions to seal documents related to trial and appellate proceedings were filed, which the court has granted but may revisit for further briefing on their confidentiality.
Additionally, the Flintkote Trust confirmed its reorganization plan under section 524(g) of the Bankruptcy Code, effective September 30, 2015, initiating payments for ASBI claims. Section 524(g) facilitates the consolidation of asbestos-related claims into a trust, preventing claimants from suing the debtor and allowing for a streamlined process to manage Trust Claims that meet certain medical criteria. The court noted that the Delaware District Court found it premature to decide on the applicable state law for the insurance dispute, highlighting Flintkote's concern about unfavorable California law. The discussion includes a reference to a Texas state court decision, though Flintkote does not elaborate on it. The court also acknowledged the arbitrator's preliminary views on the arbitration issue, as submitted by Flintkote.
The arbitrator designated Delaware law as governing the dispute and noted the relevance of the Fuller-Austin case in the final Phase I rulings. Flintkote, in its arguments, failed to acknowledge this relevance and maintained that Delaware's choice-of-law rules should apply. However, the Court clarified that this principle does not hold when the plaintiff initially filed in the transferor court to avoid the transferee court's laws. Flintkote's alleged forum shopping was noted by the Delaware District Court when it transferred the case.
The Court criticized Flintkote's extensive efforts to distinguish Fuller-Austin, asserting that these attempts weaken its conflict of laws argument. Flintkote's references to California cases that purportedly undermine Fuller-Austin were deemed unconvincing, as those cases addressed the timing of an insurer's payment obligations, not the nature of the obligations themselves.
The Court highlighted the ambiguity regarding the proper defendant in this case, noting that Aviva PLC's role as potentially not being an insurer but a holding company adds complexity. The Court indicated that if Aviva PLC or Aviva International Insurance, Ltd. wishes to be dismissed, they must file the appropriate motions. The issues surrounding the timing of payment obligations and coverage of defense costs are left for future resolution, and the Court encouraged the parties to seek an amicable resolution on these matters.
